After a somewhat okay 2023, industrial stocks could post more gains. Last year, the Industrial Select Sector SPDR Fund (NYSEARCA:XLI) gained 14%, lagging the S&P 500’s return. Although the sector is fully valued at 19 times the next 12 month’s earnings, there are several tailwinds.
So, what are some of these tailwinds? First is reshoring and nearshoring, whereby U.S. companies relocate their manufacturing footprints locally or to Mexico. That addresses geopolitical tensions and the supply chain challenges experienced during the pandemic.
Secondly, the government is incenting infrastructure spending through the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act of 2022 (IRA). The $550 billion IIJA set aside $284 billion in new spending for transport infrastructure such as ports, roads, airports and mass transit systems. On the other hand, the IRA will support battery cell production, electric vehicle manufacturing, water systems and HVAC modernization.
These incentives, plus the $78 billion in the CHIPS and Science Act, will spur a manufacturing boom in the U.S. Thus, these industrial stocks are well-positioned to capitalize on this spending.
United Rentals (URI)
With billions of dollars earmarked for infrastructure spending in the IRA, IIJA and CHIPS and Science Act, United Rentals (NYSE:URI) is a clear winner. It is the largest equipment rental company in the world. As of December 2022, it had a 16% market share in North America.
The company has the largest and most comprehensive fleet, which it rents to customers. Industrial and other non-construction rentals to manufacturers, energy and chemical companies, railroads, shipbuilders and utilities account for 48% of revenues. Commercial construction rentals to contractors account for 47% of revenues.
Overall, the company offers 4,600 classes of equipment rentals. That includes industrial and construction equipment such as earthmovers, forklifts, portable generators, backhoes, air compressors and water pumps. It also rents out specialty equipment such as aluminum hydraulic shoring systems, line testing equipment for underground work, portable generators and mobile storage.
With the breadth of equipment United Rentals has, it will capitalize on the manufacturing and infrastructure boom. Notably, infrastructure is its largest end-market, followed by non-residential construction and residential. It’s one of the top industrial stocks, and management expects to benefit from tailwinds in these segments.
Another growth engine is the specialty segment, which offers trench safety, portable storage, power and HVAC, fluid solutions, onsite services and tool solutions. The segment grew at a 27.8% compounded annual growth rate between 2012 and 2022. Still, management expects more growth in this area.
United Rentals sees broad-based strength in all end markets. For 2023, they project adjusted EBITDA to be between $6.775 billion and $6.875 billion. Thus, as of this writing, URI stock trades at a cheap trailing EV/EBITDA multiple of about 7.5. That’s a bargain for a company expected to see tailwinds from government infrastructure spending and onshoring.
CRH (CRH)
Sticking to the infrastructure theme, CRH (NYSE:CRH) is another top pick among industrial stocks. This Irish company is one of the largest infrastructure companies operating in the U.S. and Europe.
With the Bidens administration launching over 40,000 infrastructure projects, CRH will be crucial to their completion. Its North America Material Solutions segment is the largest aggregate producer in the region. Additionally, it’s the number one road paver and the top asphalt producer. It also has a foothold in cement and ready-mix concrete production, ranking third in the region.
The North America Material Solutions segment is the largest, accounting for 49% of EBITDA. It showed robust growth in the first nine months of 2023, growing 7% year-over-year (YOY). According to management, favorable construction activity was a tailwind. In terms of profits, EBITDA increased 11% YOY, aided by good pricing across all markets.
Management expects 2023’s profit before tax to surpass 2022’s $3.5 billion. CRH implemented a generous share buyback program, tapping into the impressive profitability. On Dec. 21, 2023, the company announced the completion of a $1 billion buyback. These repurchases brought the ongoing buybacks since May 2018 to $7 billion. Furthermore, it announced an additional $300 million repurchase to be completed before February 28.
Finally, CRH stock has another catalyst. On Sept. 23, 2023, it completed its transition of its primary listing to the New York Stock Exchange. Management expects this change will attract more interest from U.S. investors.
Parker-Hannifin (PH)
On January 2, Goldman Sachs (NYSE:GS) added Parker-Hannifin (NYSE:PH) to its Conviction List. Analyst Joe Ritchie issued a bullish $551 price target. He believes the firm is exposed to the $170 billion of mega projects in the pipeline.
The company’s Diversified Industrial Segment sells engineered materials, filtration systems, fluid connectors and motion systems. These technologies are key inputs into electrification, digital and clean energy industries. In motion and control, it’s the leader with a 13% market share.
As companies build manufacturing plants, Parker’s solution will soar in demand. Its products cover electromechanical, engineered materials, pneumatics, filtration, hydraulics and process and climate solutions. For example, in hydraulic and pneumatics, it provides hydraulic power units and pumps, pneumatic network controls, electric positioners, controllers and human-machine interfaces.
Going forward, incentives from the CHIPS and Science Act will support increased semiconductor fab construction in the U.S. Parker-Hannifin provides process control, fluid and gas handling, and electromechanical and filtration technologies — essential in chip manufacturing. For instance, it sells ultra high-pressure valves and pressure regulators for process control and Electromechanical Servo systems for wafer spinning.
Beyond manufacturing solutions, the company also has a strong aerospace business. Post the Meggitt acquisition, it now has a comprehensive suite of nose-to-tail aircraft solutions. Q1 fiscal 2024 aerospace systems revenues surged 15.8% YOY to 1.2 billion. Management expects strong demand driven by commercial air traffic recovery and military spending growth.
For the full year, management raised adjusted EPS guidance to between $22.60 and $23.40. Optimism in PH stock is warranted due to reshoring trends and the secular tailwinds in aerospace.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
